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Miraç Özdemir
Cost Accounting

Production Cost and Unit Cost Calculator (Capacity Utilisation and Idle Capacity)

Calculates production cost, unit cost, capacity utilisation and idle capacity cost from direct materials, direct labour and manufacturing overhead.

Version 1

Things to keep in mind:

  • Changes in work in progress, waste and by-product costing are not modelled; results are approximate where equivalent units are needed.
  • Normal capacity is the average output expected over several periods; entering theoretical (maximum) capacity overstates idle capacity cost.
  • If several products are made, you must choose an allocation key for overhead separately.
  • This tool is for information only and does not replace cost accounting records or a tax audit opinion.

Calculator

Production costs of the period

TRY

Raw materials and supplies used in production.

TRY

Gross wages, employer social security and related costs of production staff.

TRY

Energy, consumables and other costs that vary with output.

TRY

Factory rent, depreciation, insurance, indirect labour and other costs independent of output.

Output and capacity

Quantity completed in the period (units, kg, etc.).

Output expected per period under normal conditions; leave empty if unknown.

After the first calculation, the result updates automatically when you change a value.

Result

Enter the values and press Calculate to see the result here.

About this tool

Production cost has three elements: direct materials (the raw materials that go into the product), direct labour (wages and related costs of the people working directly on production) and manufacturing overhead (energy, depreciation, maintenance, indirect labour and other costs not traceable to the product). Part of the overhead varies with output (variable) and part is fixed.

Charging all fixed overhead to actual output inflates unit cost in low-output periods. IAS 2 (TMS 2 in Turkey) therefore requires fixed production overhead to be allocated on the basis of normal capacity; the share falling on unused (idle) capacity is expensed in the period instead of being added to inventory. In the Turkish uniform chart of accounts this amount is tracked as "idle capacity expenses".

Formulas

  • Prime cost = Direct materials + Direct labour
  • Conversion cost = Direct labour + Manufacturing overhead
  • Capacity utilisation = Actual output / Normal capacity × 100
  • Fixed overhead absorbed = Fixed overhead × min(1; Actual output / Normal capacity)
  • Idle capacity cost = Fixed overhead − Fixed overhead absorbed
  • Production cost (to inventory) = Direct materials + Direct labour + Variable overhead + Fixed overhead absorbed
  • Unit cost = Production cost / Actual output

Example: a plant with a normal capacity of 10,000 units produced 8,000 units. Direct materials are 400,000 TRY, direct labour 200,000 TRY, variable overhead 40,000 TRY and fixed overhead 160,000 TRY. With 80% utilisation, 128,000 TRY of fixed overhead is absorbed by the product and 32,000 TRY is expensed as idle capacity cost. Production cost is 768,000 TRY and unit cost 96 TRY; absorbing all fixed overhead would have given 100 TRY.

When output exceeds normal capacity, all fixed overhead is absorbed and unit cost falls; there is no idle capacity cost.

How to use

  1. Enter direct materials and direct labour for the period.
  2. Split manufacturing overhead into variable and fixed and enter both (the Fixed and Variable Cost Separation tool can help).
  3. Enter actual output and, if known, normal capacity (in the same unit).
  4. Press Calculate.

Notes

Amounts are rounded to the cent, unit costs to 4 decimals and the ratio to 2 decimals (HALF_UP). Without normal capacity (0), all fixed overhead is absorbed and utilisation shows 0 (not computed). Work in progress (opening and closing) is not modelled; output is assumed to be started and finished in the period. Total cost is all production cost of the period including idle capacity cost.

Sources

Frequently asked questions

5 questions

  1. Production cost of the period (direct materials + direct labour + overhead absorbed) is divided by the quantity produced. Absorbing fixed overhead on normal capacity stops unit cost from rising artificially in low-output periods.

Next step

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